That NAMA ‘gamble’… March 31, 2010

Well, if the heading on the IT editorial wasn’t enough to have you choking on your porridge, then the text beneath it was hardly more reassuring.

A multi-billion euro gamble.

Cheery. And typical of the IT’s position throughout. The editorial noting that far from drawing a line under the banking crisis this was more in the line of an update pointed to various problems. They saw some sign of optimism in the idea that less might have to be pumped into AIB and Bank of Ireland if those banks were able to sell assets. The very sane Karl Whelan dissents on (see his point 6) …

But it also noted that the ‘remarkable and unexpected disclosure that the bill for Anglo Irish could be some €10bn more than expected’.

Stop and think about that for a moment. All the agonies over the Budget delivered but a few billion in savings this last year. As a state, public sector wage cuts, cuts in service provision, cuts in CDPs etc, all that amounted to less than half of what is intended not to bail out Anglo Irish, but simply to provide the last tranche to that bank.

And those monies, whether the Government likes it or not, do come from the public purse, and therefore impact directly upon us. With all the attendant risks that one would expect from a financial sector gone mad.

In reality, nothing that could have been said yesterday would have altered the fundamental risk associated with Nama. At its most simple, it is a calculated gamble that the all-in upfront cost to the State of bailing out the banks will be less debilitating than the wider costs of letting them fail. That upfront cost is still not clear but based on the information that was released yesterday it could involve capital injection of up to €31.8 billion in fresh capital and close to €40 billion in debt issued to the banks to pay for their discounted property loans.

And as is noted:

The cost of having let the banks fail is unquantifiable and is inextricably linked to the impact on the State’s own credit worthiness and ability to borrow. Ultimately the view was taken that standing behind the banks and their obligations to international debt markets was preferable to letting their bond-holders suffer the consequences of the banks’ greed and stupidity.

Which is interesting, because then the editorial notes that:

The approach was necessarily kinder to the banks than many would consider appropriate, giving as it did the two big institutions a fighting chance of staying independent. Their subsequent behaviour has done little to counter the perception this was a mistake. Executives hung on grimly to their jobs; business screamed for credit and borrowers saw interest rates rise while the European Central Bank left its rates at record lows.

An attempt is made to provide some, but not a lot of justification…

Standing where we do today, the trade-off does not seem obvious. But it is worth remembering that when Nama was first proposed over 12 months ago, Ireland faced a predicament not unlike the one Greece finds itself in today. The state of our national finances was such that serious doubts existed about our ability to manage our way out of our problems and there was a real possibility that debt markets would be closed to us.

And yet and yet, curiously NAMA has not been central to the argument about debt markets. Instead it has been the cost of the public sector that has driven that argument. Now, the two issues are not mutually exclusive, and that could well be sleight of hand on the part of the government, attempting to divert attention (and how successfully that project has worked out for them on one level, whereas not so much on another) while they tried to patch up the financial sector. And yet and yet and yet… Michael Taft has a most interesting piece on bond yield trends across the course of the past year or two… And yet, and yet and yet redux. Ireland is the laggard in terms of bringing forward measures to address the situation. We stand some 12 months if not indeed more behind our friends in Europe and more widely afield in presenting ameliorating instruments.

That’s not good by any reckoning.

And the IT recognises this implicitly:

Things have improved dramatically since then, due in part to the Government’s efforts to resolve the banking crisis. That does not validate Nama in itself but it underlines the need for some sort of determined action 12 months ago.

Yes. Do something, anything. Chuck a few chunks of red meat in the water in hope that the sharks will swim after them rather than try to tip over the boat (by the way I’ve never been in that position, the closest being a spectator to Roy Scheiders efforts in Jaws, so I have no idea would it work).

In truth, Nama is a product of expediency. Making it work will require an ongoing, high-intensity effort. It will have to be scrutinised and revisited repeatedly over the next decade and longer. But public confidence is in short supply and the unexpected addition yesterday of a potential extra €10 billion to the cost of keeping Anglo Irish afloat has done nothing to help.

But here’s the thing, can you imagine an editorial in the Irish Times yesterday, today or tomorrow which might argue that diverting say half, or a quarter of the €10bn to a stimulus package would be a good idea? Ideologically they cannot, would not, do so.

Simon Carswell is no more cheerful in his analysis in the Irish Times when he quantifies the ‘investment’ in the banking area that looks likely to top €80bn inclusive of NAMA (indeed the FT argues that… . And as he says, ‘it will be some time before the State is able to recover even a fraction’… how long, one wonders?

And as has been expressed so forcibly elsewhere, there are alternatives as regards NAMA. And always have been. And nor is it possible to cleanly separate it from other aspects of our predicament. The IT recognises as much.

But for a more disturbing, indeed quite frightening view, we need only turn to another paper’s editorial, that of the Financial Times which argues that NAMA takes on a bad loan book with a ‘nominal value of €81bn’, ‘a huge risk’ and ‘represents a frightening 47 per cent of Ireland’s 2009 GDP’. It then continues by arguing that such a risk could only be taken if taxpayers costs are minimised and bank losses are finalised, a situation which as it notes ‘neither of these conditions has been clearly met’.

Unfortunately, the resulting losses will not be shared beyond the equity holders. Until September, the debt holders will continue to be guaranteed. This means the state will have to underwrite any equity injections needed to recapitalise the banks.

Worse again:

A second flaw is that Nama does not truly draw a line under the losses. Although Ireland’s finance minister, Brian Lenihan, promised a “once and for all” solution, the deal leaves open the possibility of a subsequent levy on the banks if Nama itself makes a loss.

It doesn’t take a genius to work out that any subsequent levy would be at least in part paid for by the customers of said banks. Great. But elsewhere the FT is not entirely convinced by the plan… noting that the core tier equity capital ratio of 7 per cent, although as noted by Carswell considerably lower than other competitors, is in and of itself a ‘tough target’. And worse, how capital will be raised remains open. Bank of Ireland intends to raise €2.7bn privately, a figure which as the FT notes is ‘double its current market value’, while AIB must find €7.4bn which will necessitate the sale of assets across Europe and in the US.

Which makes one curious as to what sort of banks are BofI and AIB to be when all this is over, and what sort of value they will have? And what of the rest of us forced to stand by and watch?

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‘Which makes one curious as to what sort of banks are BofI and AIB to be when all this is over.’

Absolutely. And even more so Anglo. What is Anglo for? What function could it possibly have in the future? Why are we saving it?

This has been obvious since the guarantee. I put a comment on here about a year ago saying that the government’s rationale for rescue, that is, lending for SMEs, getting credit flowing etc., would not explain the rescue of Anglo and Irish Nationwide because they never lent to small businesses anyway. Recently, I was told a story by a friend who runs a small business (well, more of a facility than a business) in Dublin. About 2006 she wanted to extend her premises, and was looking to borrow about €80,000. She phoned around all the banks and Anglo refused even to discuss it. The man laughed derisively, said that they didn’t lend sums smaller than two million, and put down the phone.

Our society is going to be stripped clean to pay for this institution. And we won’t get anything whatsoever back for our thirty-five thousand million. Except maybe a sanctimonious lecture on the free market.

“What is Anglo for?”
Great question. I had never heard of it most of the while of living in Dublin, and assumed it was some bigwig business bank. Who invests in it? what does it invest in? If they (sorry, I mean “we”) had put the same money into AIB or BOI at least we could say ordinary folks would benefit but there’s little of the ordinary about Anglo.

NAMA will insure that Ireland underperforms other industrialised countries for the foreseeable future. As you mentioned there were other options indeed the Government could have gone so far as to restrict withdrawls to nominal amounts. National impoverishment is our future.

I provide a snippet below in which the Irish bank rescue plan is portrayed as a bad model according to a former chief economist from the IMF.

Will the U.S. Become the Next Ireland?
Economix, New York Times
18/3/10

By Peter Boone and Simon Johnson

. . .The latest round of (Irish) bank bailouts (swapping bad debts for government bonds) greatly compounds the fiscal problem. The government will in essence be issuing one-third of G.D.P. in government debts for distressed bank assets that may have no intrinsic value. The government debt-to-G.D.P. ratio of Ireland will be over 100 percent by the end of 2011 once this debt is included.

Ireland had more prudent choices. It could have avoided taking on private bank debts by forcing the creditors of these banks to share the burden — and this is now what some sensible voices within the main opposition party have called for.

But a strong lobby of real-estate developers, the investors who bought the bank bonds, and politicians with links to the failed developments (and their bankers) have managed to ensure that taxpayers rather than creditors will pay. The government plan is — with good reason — highly unpopular, but the coalition of interests in its favor is strong enough to ensure that it will proceed.

Investors may wish to remain pleased today with Ireland, but Ireland’s “austerity” — reflecting an unwillingness to make creditors pay for their past mistakes — hardly seems a good lesson for Greece, the euro zone or anywhere else. . . .